Inflation adds another R288m to Gautrain costs

Posted On Monday, 09 November 2009 02:00 Published by eProp Commercial Property News
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The government has paid an extra R288m to fund the Gautrain Rapid Rail Link, due to cost overruns caused by higher than expected inflation.

Gautrain ProjectThe government has paid an extra R288m to fund the Gautrain Rapid Rail Link, due to cost overruns caused by higher than expected inflation. The additional cost is being shared by Gauteng and the national government. The cost of the project now stands at R25,4bn, from R7bn at the time of the project’s approval, in 2005.

In last month’s medium-term budget statement, the government allocated R144m to the Gauteng provincial government as a one-off annual payment to reimburse Gauteng for escalation costs incurred on the project.

Gautrain spokeswoman Barbara Jensen said the provincial government had budgeted for the amount and it was already available.

The money will be paid over to compensate for contractual cost increases as a result of inflation and foreign exchange losses, the Treasury’s document showed.

Jack van der Merwe, CEO of the Gautrain Management Agency, said the financial model for the Gautrain required the government to pay in when inflation was higher than predicted.

The agency uses the Reserve Bank’s five-year predictions for inflation, which this year put inflation at 4,5%-5,5%. Consumer price inflation was running at 6,1% in September, according to Statistics SA, but has been higher.

Jensen said payment certificates included a calculation of inflation each month, and the difference between projected inflation and actual inflation each month resulted in an additional amount being paid to the concessionaire, the Bombela consortium.

Van der Merwe said in July this year that the Gautrain would cost an extra R300m due to inflation exceeding predictions. The national and provincial governments are each responsible for half of this cost.

Transport consultant Wendy Watson said cost escalations were common with large construction projects. “Even when you build a house, you have to budget an extra 25% for unforeseen occurrences, such as different soils or safety requirements — things you don’t expect,” she said. “That would be a normal escalation. ”She said a project like Gautrain could be expected to have more cost escalations due to the longer construction period.

Gautrain’s construction period is expected to run over five years, against the 18-month period to build the average house, she said, which could mean three times the amount of escalation.

“Once you enter a project, you can’t go backwards or change your mind. That would mean wasting the money you have spent already,” she said.

 

Last modified on Thursday, 31 October 2013 09:57

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